Billionaire Investor Gives Critical Warning About AI CAPEX

Welcome back, everyone. Today on the Joseph Carlson Show, David Einhorn, the legendary billionaire investor himself, has given a pretty scary warning about artificial intelligence. Now, it's not a warning about the powers of AI or what it might do to society, but rather a warning about the return these companies are getting when they spend hundreds of billions of dollars on CapEx. That's right. David Einhorn believes that there's going to be, quote, tremendous levels of capital

destruction. We're going to be taking a look at his remarks, why he's so concerned about it and how we can think about it. We also have in terms of his remarks, Tom Lee giving his thoughts on the AI build out, what he believes the returns will be, what he believes is the immediate impact of these companies and why some AI companies are trading down. So he'll be looking at his comments as well as Jensen Wong's as the CEO of NVIDIA. Of course, he has something to say about this as well.

He gives specific examples about the returns of spend on AI and how he sees it playing out. So we going over all these commentators, investors and CEOs to see what we can make about the return on AI spend. If the hundreds of billions of dollars these companies are using to build out this CapEx are going to get investors a good return. Of course, we have a lot of other news to get to. Costco just reported earnings. This is one of my larger better

investments that I've made. I've owned the stock for years. Costco stock is down a couple percent after the earnings, but should investors be concerned? I'll be going over the earnings showing you my thoughts on it. We have news of a fresh potential scam. You know, Taya Lopez, that guy, remember him that this is my garage guy. Well, apparently he owns RadioShack and Pier One and he's been accused of a lot of things. We'll be taking a look at that

report. And then finally, we have a a new advertisement from Duolingo showing off some of the changes they're making to chess. Duolingo is pushing full steam ahead in chess. I'll share some thoughts on that as well. So as always, we've got a lot to get to in this episode, a ton to cover.

And we kick things off today by talking about this stark warning from David Einhorn. Now, if you're not familiar with David Einhorn, he's this legendary investor and billionaire hedge fund manager of Green Light Capital.

He became most notable from his short of Lehman Brothers. So while everything was going on with the big financial collapse, there's only a few investors that really anticipated that beforehand. These were investors that could determine that things were going to go South. You have, of course, Michael Bury, you have Mark Baum, you have all these bigwig investors that knew things were going to go South and they bet against the big banks. Well, David Einhorn was one of them.

He correctly anticipated that Lehman Brothers was going to go belly up. He saw all the money they were spending, all the promises they were making. He looked at the actual financials and he identified that things weren't what they seemed, that there is far more risk in the situation that investors could ever comprehend. And he made a fortune and his name at least a more notable name from that big event. So you get a lot of credibility when you make a big bet against something like that.

And it goes. So right after Green Light Capital made a fortune betting against Lehman Brothers, David Einhorn has consistently given caution where other investors are bullish. So you see the similarities here. Investors are really amped up about AI. We're all excited about it. We see the future. Many of us are super bullish on these companies like Google and Meta and Microsoft and NVIDIA. We're all looking at all the possibilities. And David Einhorn here sees it very similar to 2008.

He's looking at it where everyone else is bullish, everyone else is making money, and he's looking with a bit more skepticism. And so he's ringing this warning once again, and it causes a bit of concern for investors. Bloomberg reports that the hedge fund manager David Einhorn cautioned that the unprecedented amount of spending on artificial intelligence infrastructure may destroy vast amounts of capital, even if the technology itself proves transformative.

So that's the distinction here. He's not bearish on AI itself. He's not saying the artificial intelligence isn't incredible or transformative. He's simply saying that it may not give the best returns. The Green Light Capital founder said the trillion dollar build out by companies overall such as Apple Meta Open AI is so extreme that the eventual returns are

highly uncertain. While he expects AI will ultimately surpass today's bullish forecast, he questioned whether, quote, spending, and this is the important part, quote, spending a trillion dollars a year or 500 billion a year will deliver good outcomes for the firm's making those investments. So he's basically just saying, we're spending so much money, how can you actually do analysis of whether or not we're going to get a good return here?

Quote, The numbers that are being thrown around are so extreme that it's really, really hard to understand them. I'm sure it's not 0, but there's a reasonable chance that a tremendous amount of capital destruction is going to come through this cycle. There you have the big line. These numbers are extreme, really, really extreme. You can't understand them. And there's a reasonable chance that a tremendous amount of capital destruction is going to

come through this cycle. Now, this comes directly after Sam Altman himself said he wants to spend trillion dollars on this problem open AI. Sam Altman said he wants to spend trillions of dollars on infrastructure over the not distant future. So in the very near future, he's he's talking about numbers of trillions. While Meta's Mark Zuckerberg has also talked about spending hundreds of billions of dollars in data centers. In February, Apple said it would plan 500 billion domestically

over the next four years. We had Zuckerberg just at the meeting with Trump saying he's going to spend $600 billion. It's hard to grasp the the gravity of these numbers. Then you also have Amazon, which is one of the biggest spenders, spending just untold fortunes on data centers, building out this capacity. So we have the CE OS very excited about this. They're very excited to invest all this CapEx. They have a place to put all their excess returns, but what do we get out of this?

What is the expected return? As investors, we need to know the ROI we're going to get before we make an investment. So David Einhorn made a couple things clear. He's aware of the technology and he's not debating whether or not the technology is amazing. So people saying look what AI can do, it can do this and that. He's aware of that. He's only saying that these tremendous numbers have to have an ROI, and what we don't see right now is clarity with that ROI. And he's very skeptical.

He believes like many of the cases in the past, like building out telecom or Internet infrastructure, lots of companies actually had poor returns in the past. And there's many cases also where technology can be amazing, it can be innovative, it can it can revolutionize the world, but it doesn't make for a good investment. We can look at airlines as an example of that. So it's not always a case where you have incredible technology always leading to incredible investments.

In some cases it can be just the opposite. And this is what David Einhorn's particularly concerned about now, given his context, he is one of those people that often has this skeptic bent. He's also looking at things through a little bit of a a pushback. He's never just taking the narrative for what it's sold to be. And so he has a history of making these type of contrarian calls in the past, no doubt about it. But I don't think that should discredit the points that he's making.

And overall, his discussion on this panel restating these concerns has started this debate all over again of whether or not we're going to get a good return from all this AI CapEx. Now, of course, we have Fundstrats, Tom Lee, who believes that this is a super cycle. It's worthy of being invested in. But he does share some similar concerns that that doesn't mean every single company today is a good buy as long as it's an AI

company. A. Period where there is a super cycle and exponential growth opportunities within AI, but it doesn't mean every company that has elevated valuation today deserves to actually have the capital and that and and that company may not even reinvest that capital properly to be a survivor.

So I agree there is going to eventually be a shake out, but I think valuations strangely enough are actually pretty reasonable today compared to 1998 because you know, 1998 was that lift off point before that final 18 month surge. And I I'd say the best benchmark is NVIDIA trades at 26 times forward earnings. Cisco at that same exact moment was at 60 times and Cisco's PE peaked at 210 times forward earnings. So NVIDIA to me is still a

bargain at 26 times. It's cheaper than Costco and Walmart, which are close to 50 times forward earnings.

He accurately points out that many of the AI leaders like NVIDIA are at a cheaper PE ratio than the more stodgy retail companies that have been around forever, like Costco and Walmart. He also points out correctly, that NVIDIA today trades at a much cheaper valuation than any of the companies precedingthe.com bubble that were blown up. So if you're trying to make comparisons to this epic collapse, we're having terrible

returns for the next 10 years. Comparing it to the.com bubble, the situations are just not the same. The valuations are vastly different between companies now and when they were in the.com bubble. In fact, you still have companies like Meta and Google at mid 20s PE ratios. That's not even a high PE ratio even historically speaking for great companies. So there's many forward-looking AI companies investing heavily in CapEx that are still trading at reasonable valuations.

And I don't believe that David Einhorn here was saying that we're in the.com bubble. He didn't say that anywhere, to be fair to him. But I do believe this gives us a bit more safety. He says that a lot of this CapEx may be wasted. Well, a lot of it's being priced today as being wasted. These companies aren't being priced to have exponentially high returns. They're being priced 20 to 25 PE ratios, which is very good PE ratios for high margin sustainable business models.

So I, I see what he's saying here. I agree to some extent with David Einhorn. I think there is going to be a lot of wasted capital in the future, but investors are pricing that in to some degree. We don't see the same exuberance in this market that we saw anywhere in 2021 or even 2000. It's far different by the math

in both of those situations. Now in terms of return that we're getting on all this AI CapEx spend, this is also something that I think mathematically can be pointed out that we are getting return already on AI spend and nobody really says it better than Jensen. Jensen argues that we're already at $100 billion plus of AI revenue across these various tech companies and that other industries, in fact other trillion dollar industries, are going to be moving to AI revenue.

You can't do tick tock without AI. Correct? You can't do YouTube short without AI. You can't you know you can't do any of the stuff without AI. The the amazing things that that meta's doing for for you know, customized content, personalized content. You can't do that without AI. It's all of that stuff used to be humans, you know, doing content a priori, creating for choices that are then selected by a recommender engine, and now it's infinite number of choices

generated by an AI, right? Jensen argues that the transition to AI revenue has already started. And you can see it in these big tech companies. Many of the products that they have today, from advertising to algorithms, are now all AI driven. They are in part AI revenue. So a lot of people are viewing this as we're building out all this AI infrastructure and we have to wait to see the return. But Jensen is saying you don't have to wait. We're already seeing it.

Look at the revenue growth growth of Google, look at the revenue growth of Amazon, look at the revenue growth of Meta and Microsoft, and so on. These companies are enhancing their core business models from online retail to advertising all their algorithms. TikTok has made their algorithm better through artificial intelligence. That's what's driving usage engagement. More views, more money, more ads, more optimized ads and so on through artificial intelligence.

And he's saying that it's going to work its way through the big tech companies to the rest of the world to overtime $10 trillion of revenue. So while I agree with the concerns of David Einhorn, I agree with the skepticism, especially when these massive numbers are being thrown around. In some cases, I believe that these numbers are a bit of marketing from the CEO's. They're trying to one up each other and say that they're spending more and more.

We'll see how it really manifests over time. Nothing's guaranteed, but I tend to find myself agreeing more with Jensen here. I believe the transition to revenue through AI has already taken place, and you can see it in virtually every single digital product. You use everything. Look at any digital product you use and it will have some type of AI application. Even call Trim, which I've built, has dozens of AI applications. We summarize the news.

We we look at all the articles. We judge it based on what's the most notable. We display the most notable news. AI summarize, this is an AI feature. Now. Are we able to directly track the revenue from that one feature implemented? Not directly, because it just makes the product a little bit better overall. And every single company is doing the same thing, infusing their products with enhancements, engagement and tooling with artificial intelligence.

Big tech companies that are spending the most in investment like Microsoft, Amazon, and Google are the ones that are creating all this tooling. They're the backbone of all of this. They're hosting all these websites, they're doing all the processing power for this AI. Nvidia's selling them a very important ingredient of that tooling. So I'm much more inclined to invest in this technology. I do not see it as a flavor of

the month. I don't see it as something to be left behind on. I think the AI is very real and investors are going to be very hurt if they try to avoid it. Now, let's go ahead and get to some news. First of all, we have Costco just recently reporting their

earnings report. And as I noted here, Qualtrum gives us a nice summary of the most important news of the day. We have here that Costco reported their earnings. It says that revenue was $86.16 billion and earnings per share was $5.87, both of which topped estimates. So they be on the revenue and the earnings per share. They said the membership fee was up 14%, which is incredible. That's that's membership fees. That's a growth in the

membership business, up 14%. The share slipped 1% after hours yesterday because they missed their company comps with 6.4% adjusted. Now the comps are basically the same store sales. Whether or not it goes slightly above estimates or below estimates causes the stock to go up or down. In this case, they missed estimates on their comps ever so slightly. The stock is down. In my opinion this is very short term stuff. Costco has missed these comps.

They've beat their comps many times throughout history. What matters here is the overall growth of the company. So we have their overall a decent earnings. It looks like they came rather in line. If I look at my equity stake in Costco, we can take a look at it here. It's in the consumer category. It's a $79,000 position, $45,000 in the green. Now, I've held Costco for years and years. I bought the first share of it at the tail end of 2017.

So this has been just a massive winner, a stock that's gone up and up, and the fundamentals continue to improve. So I've done well in Costco, but I'm not buying it today because

of the higher PE ratio. In fact, I've pointed this out a few times, but there's a chart here that shows the historical valuation of a company, and I think it's one of the best charts in Qualtrim. You can easily look at the past five years, for example, we have Costco here, and this is where I last bought Costco, right about there. So I bought it right there and the trailing PE ratio at the time was a trailing PE of like 40. Right now the trailing PE is 55. So it's far more expensive today

than my last buy. What have I done in between now and then? I've simply just held the company. That's what I do in my companies that I really love, get a little bit overvalued. If they get a little overvalued, I don't sell. I just hold and Costco pays these massive special dividends. These dividends are just incredible. In this case, I reinvest these dividends into different companies. So I'll show you an example of one other special dividends. Here's their normal dividend.

They pay about $1.30 every quarter and then all of a sudden they paid $15 per share in a single quarter. To me, that was a couple $1000 in a single dividend. I took that money and instead of reinvesting it back into Costco, I bought more Google. I'll buy more whatever company I'm buying at the time outside of Costco, which I think is a little bit overvalued. O this is the case for these Tye of companies, and these are the judgment calls investors have to

make. When a company becomes at a point where you consider it slightly overvalued, like I do with Costco, you have to make the judgement call of whether to hold or whether to sell. And I'm very resistant to sell in most cases. I like just holding on to it, letting the fundamentals catch up a little bit, and then it resumes its growth and share price. So that's what I've done with this company.

Now, looking specifically at this past quarter, I just want to highlight the excellence of Costco. Even though the stock has been flat most of the year, the company's performance has not been flat. In fact, it's rapidly bringing down the valuation while growing organically. If we look at the revenue, for example, the revenue is up 8%. But this kind of masks the real organic growth of the most profitable part of Costco. When we look at Costco's warehouses, another 2 1/2

percent increase. So they went from 905 to 914, incredible growth in their warehouses. We look at the card holders. These are the people paying Costco. We have right here it increasing by over a million, about 1,000,000 1/2 from 142.8 to 145.2. So we have a nice gradual increase in the membership. They're literally gaining millions of members every single quarter. What company does this for like 20 years gains consistently millions of new members. These are paid members every

single quarter. What I see from Costco is a company that just marches bigger and bigger every single quarter. Every single quarter there's new warehouses. Every quarter there's a million more members. Every quarter, they're growing that active membership revenue. Every quarter, they're keeping the retention rate. It's just hard to not like this company.

And I'm aware of the valuation. I know that you can make these comparisons like NVIDIA being cheaper, but frankly, I think that investors are a little bit more certain about the future of Costco over the next 20 years than any rapidly evolving tech company. I think that's just the difference. People know you're going to want your groceries, you're going to want milk, you're going to want your water, you're going to want your your meats and produce.

You're going to want all of that a very nice, convenient place to get it. You're going to want value in the future. And while NVIDIA may be cheaper on APE ratio today, there are reasons for that. Nvidia's far more reliant on rapid technological advancement, more reliant on having extremely skilled developers and engineers constantly building stuff. Nvidia's competing with many great companies in China and across the United States, like

AMD. Costco doesn't have to deal with all those rapidly evolving changes. Costco's disruption risk, rapid technological advancement, things that could really hurt the business seem much fewer than a company like NVIDIA. So I think part of the elevated valuation is not an assumption that Costco will grow faster, but an assumption that Costco will grow more consistently, more predictably for longer. And I believe part of that is

justified. Now it's going to move on. We have other news here. This came as a bit of a surprise for a lot of different reasons. We have here from the New York Post that the owners of RadioShack and Pier One Imports were accused by the SEC of operating a 112,000,100 and $12 million Ponzi scheme. Now, this headline's a mouthful and there's a lot of surprises in it. Right off the bat, I'm surprised by a couple of things. First and foremost, that RadioShack is still a thing.

Is that really still a thing? I haven't seen a RadioShack in a long time. That's where you go to get batteries that are twice as expensive as they are on Amazon. That's where you go if you aren't aware. If you're like part of human society that's not aware that Amazon exists. I'm convinced those are the only people using RadioShack. But anyway, apparently RadioShack is still a thing and now it's turned into a big Ponzi scheme. Let's go ahead and read some of

this. It says a pair of flashy e-commerce entrepreneurs who brought who bought bankrupt retail giants including Pier One Imports, RadioShack Madila's Sporting goods have been accused of running a $112 million Ponzi scheme. According to the new lawsuit, the US Securities and Exchange Commission accused Alex Mayer and Tai Lopez. Tai Lopez, this guy, I haven't thought about him since. Here I am in my garage. Remember the guy that's in his garage and he has all the nice

cars? He has the books in his garage because that's totally normal to keep a big library of books right in your garage. You know, here he is stepping out of a what looks like a private plane.

According to the federal Southern District of Florida filing obtained by The Post, Lopez is also social media influencer who has written several self help books, including his 67 steps on how to become wealthy that incorporate teachings of powerful and famous people like Bill Gates, Charlie Munger, Peter Drucker, Gandhi and my personal mentors. So he's name dropping a lot of names there. But I can't bash that book. I have not read it.

Now, these two guys, apparently they made, quote, material misrepresentations to hundreds of investors about the brand's performance between 2020 and 2022, including claims that the companies were on fire, the SEC alleged. Material misrepresentations, I believe is just a legal, nice way of saying that they lied. They completely misrepresented

how the companies were doing. Now, in terms of disclosures, if you have investors, the purpose of a disclosure is to show how the company's doing, to be truthful about it. You can use some interpretation, but you can't lie. The SEC saying that they, they said the companies are on fire is signifying that they're doing great, right? That's, that's everybody's interpretation. That is the most straightforward, reasonable interpretation that if I say a company's on fire, I think it's

doing great. So let's see what the companies were actually doing contrary to these representations. While some of the Rev retailer brands generated revenue, none generated any profits, the lawsuit said. So these companies that were on fire, maybe they meant it in the the terms that they were literally like on fire, like they're burning and they're in desperate help. Maybe they were saying it's like they're on fire, a fire that needs to be put out, right? Like I'm putting out a lot of

fires. Maybe that was the case here because none of these companies made any money. We don't have here, whether or not they were growing rapidly, whether they're trending towards profits.

But if you're saying that your company's on fire and it's just losing money, that may not be the most accurate way to describe it. Consequently, in order to pay interest, dividends, maturing note payments, defendants resorted to using a combination of loans from outside lenders, merchant cash advances, money raised from new and existing

investors. That's a problem there, money raised from new and existing investors and transferred from their other portfolio of companies to cover obligations. So this is a common theme in Ponzi schemes. And again, I don't know if this one actually is, but a common theme is that you're you're portraying things to your investors that aren't true. You're basically just lying to

your current group of investors. You're seeing things are going better than they actually are when they're expecting to get paid certain amount of money or when they withdraw money. You have to come up with that money, but your companies aren't generating any profits. So to come up with it, you have to dig deep. You have to find different ways to come up with that money that doesn't really exist.

And in many cases, you're just giving back the same money that the people put in. But instead of saying it's the same money, you're saying this is the return on your investment. It's highly misleading. And usually this is how it all ends. This is how it typically Ponzi schemes end. The agency also accused them of taking $16.1 million for personal use. So they're they're using this as their personal Piggy Bank. That's a big no no.

That's generally frowned upon. Taking investors money and just using it for whatever you want and then also returning back their money from new investors raises a lot of red flags. So I'm not surprised to see Taya Lopez back in the news, but I am a little surprised to see it this way. I'd completely forgotten about this guy. And I'm even more surprised to see RadioShack back in the news as well. But there you have it, we have

RadioShack and Tai Lopez. No surprises here. Now moving on, we have more news about Duolingo. This is my most recent investment. I outline my thesis for the company, why? I believe it's actually a decent company. It's growing quickly, it's high margin, has great cost structure. It has a lot of users. It's a company that trades at a relatively low market cap and we have it here back at $321.00 per share. Now this is a stock that it's up 2 1/2% today, and that's normal.

It's up and down to to three percent, 4%, even 5% on a daily basis with literally no news. It is one of the most volatile stocks that I own in terms of the stock price trading, but the company itself is rather stable. The revenue continues to grow, the users continue to grow, and I like it fundamentally. When I look at Duolingo, there's been a lot said about this company and this investment when it's actually been relatively

tame overall. It had initially a massive surge in stock price, then the stock price dropped, and now it's come back up kind of to where it was right now. I'm down around 8% on this position. Now when we look at what Duolingo's currently doing, I just want to outline the marketing prowess of this company, how good their marketing actually is in their social media, and their ability to cross sell within their

platform. Here's a new advertisement they just released on their new development of the CHESS program within Duolingo. Another win for Oscar. But hey, we all have to start somewhere. Experience my genius. Become a chess master. One lesson at a time. New to the game? I'll show you the basic moves. Giddy up? Already a king of the board? I'll teach you advanced tactics. Fork, baby, fork. I've.

Right there they outline that this is for new players, the chess and Duolingo is it starts you off at a new player. In fact, it asks you for how advanced you are when you're starting off. But it will teach you right from the beginning. If you've never played chess, if you even don't know how the pieces work or what they're called or what they're worth, it'll teach you all these strategies from the beginning. But he also highlights there that it's also for advanced players.

They do have courses for advanced tactics within chess. So this isn't something where they're just treating it lightly for introductory players. They're trying to address the entire market of chess, from beginner to advanced. We've got thousands of puzzles ready for a real match. Don't worry, I'll go easy on you. Whoopsie, I won. This is another thing when you're playing against Oscar and the AI, he will talk to you as

you're playing. He'll kind of rib you as you're playing and make these little remarks as you take pieces or he loses pieces. It makes it a bit more interactive. But this is where Duolingo Chess is today. And now we get to the direction it's headed. You says smart and talented Oscar, what will you think of mixed? Oh, you know me. I've got some big, big plans. Scintillating new animations. The first thing there he

mentions new animations. Now again, if you're an advanced chess player that's been playing chess for years on chess.com or one of these other bigwigs, smart chess competitors, you're going to look at that in scoff. What's the big deal about animations? They are a big deal. Making the game more fun, more entertaining, making you laugh a little bit when you're playing it is a pretty big deal. And that's what Duolingo excels at.

They're going to make the game a bit more engaging, just a bit better of an experience than a lot of the other competitors. And they do this through consistent AB testing. So the animations while you're playing, I believe it's just going to be 1 aspect of it. Track your ELO progress. ELO is a ranking of how good you are at chess. It's an overall ranking of your skill level, and you can see your skill level going up over time to see if you're progressing. This is another thing they're

implementing. They already have ELO, but now you're going to be able to track your progress. Undo those pesky stalemates and finish the match with a proper boom. Oh, and there's one more thing. Soon you'll be able to play against other learners. Go for the win. I believe this is a first time for Duolingo, the first time they've introduced anything where you have player versus player experiences. So far everything has been kind of a solo experience.

Even though you have rankings and like ladders of your progression, you never directly interact with other players or other speakers when you're learning a language. But now you're going to be able to play directly against other players of similar the same skill level to see if you can move up against them. Maybe I've taught him too well. Just a reminder, chess has over 500 million players worldwide. It is one of the most popular games ever made.

It takes a lifetime to learn how to actually get good at it. So it's one of these games that's widely popular, takes forever to learn. It's the perfect type of vertical for Duolingo to go into. That's why they selected it and I believe why they're going into it so much. When we look at the growth of this company, the daily active users is the most important metric by far. This has been growing overtime steadily, now at 47.7 million and they already have over

1,000,000 on chess alone. So I believe this represents a pretty meaningful growth path for the company. I'm excited to see what happens and as you have player versus player ladder rankings, social media, I believe it's going to garner a lot more interest from pros that want to climb the ladder on Duolingo. And I could see this a lot more

on social media. This is going to be an interesting one to see how it transforms over the next three years, if it is a good investment or if it's not, if the Bears are really correct on this one or if they're wrong. But either way, as of now, I'm still invested. That's going to be it for this episode. Enjoy your weekend and see you in the next one.